Now that we have established some terminology, let’s take a closer look at the FY19 budget.

In this post, I’ll be breaking down the budget that was passed in May 2018, for fiscal year 2019 (which began in July 2018).

Disclaimer

If you want the source data to do your own research, I found it here. But please note that when you query the LegFi database, the numbers aren’t provided in the same way their reports are written.

When you find a discrepancy between these numbers (which I got from LegFi) and a number published in a report, the report probably has the right number. They simply have access to updated information, better query tools, and a deeper understanding of the data than I do.

Budget Totals

The total budget for FY19 is about $11.2 billion ($9.7 operating and $1.5 capital). It’s likely that another $100 million or more will be added to this budget as a supplement during the next legislative session.

Chances are that you were thinking the budget was something like $4.7 billion ($4.6 billion operating and $0.1 billion capital). That is true – if you only look at the Unrestricted General Fund (UGF) portion of the budget.

Note: some people include the FY18 supplemental budget passed last session as part of the current spending. That would get you to $4.8 billion UGF if you want to think about it this way. I didn’t in this article.

But to really understand what is going on, we need to look at the big picture. So here you go.

This is a visualization of where all the money is going. Go ahead and spend a few minutes playing with it. There’s a ton of information there. And it’s interactive. You can click on the fund source on the top right if you want to zoom in on one. There’s also a button on the lower right corner that let’s you go full screen, if you want.

Tying in Revenues

And here is how we are paying for all those expenditures:

It is also important to compare the money we are taking out of those funds to the money that is flowing into them. Here is a comparison of revenues to expenditures:

A few things to note on that chart above. First, note that the DGF and Federal revenues pretty much wash. That’s why we don’t pay that much attention to them.

Second, the UGF revenue estimate is mine, based on updated oil prices. That red bar was almost $1 billion lower when the legislature was preparing this budget. The gap between the blue and red bars is the deficit that everyone is talking about. Oh, and I’m sticking with the traditional accounting of the PFD as a non-UGF expenditure (I have it in the “other” category). 

And finally, the red bar on the right includes my estimate of investment earnings. If you use the APFC number, it is about $3 billion lower. However, the APFC doesn’t appear to be updating their projections despite having stellar returns so far this year. So, I’m making my own guess based on historic performance and year-to-date returns.

Of course, Legislative Finance doesn’t include this revenue in their reports at all. They only count the transfer into the general fund as revenue, rather than the earnings of the fund. That’s a conversation we should all be having.

To balance that budget, the legislature is using some of the excess revenue from the “other” category, mostly investment earnings from the Permanent Fund. Part of those excess revenues are derived by making the blue bar smaller (PFD cuts).

Putting it all Together

Here is a really cool visualization I made to show the flow of money from the revenue sources, through the different funds, and into their final usage.

A flow diagram of all state income and expenses.

I spent hours making this “viz” and I think it’s awesome.

I know it’s very confusing and hard to read (click to enlarge). But, this cash flow approach forces us to adhere to the accounting rule that all cash in must flow somewhere. That’s important, and missing from the current conversation.

For grounding, the colored lines are flows of money. The color represents the revenue source and the size of the line represents the amount of money flowing. Everything flows from left to right.

The part that I would direct your attention is the “fund growth” usage (on the right near the top). That is the sum of revenues that exceed the budgeted expenditures.

In other words, although there is an unrestricted general fund deficit which requires a draw from savings, there are earnings that more than cover that draw.

The net effect is that the deficit only exists in the microcosm of the UGF universe. Meanwhile, the total cash flows of the State yields a budget surplus.

I think that illustrates the point I tried to make before. We probably could have afforded the full PFDs over the last 3 years, and the FY20 budget problems might not be as bad as we think.

What We Pay For

When it comes to the budget, I know the question most people have is this: In plain English, what exactly does the State government do? Where is all this money even going?

Well, I’m here to help. Here is a really brief description of some of what the State does with the money and what it costs.

Education ($1.3 billion)

This is the money that pays for the State public school system. Just under $1.2 billion goes out in grants to the local school districts, who then hire teachers and pay for the costs of running the schools. Another $78 million pays for student transportation.

The rest pays for a variety of programs including pre-k, home school coordination, juvenile detention education, child nutrition, libraries, museums, and others.

Health and Social Services ($1.1 billion)

The biggest chunk of these costs pay for the State’s share of the Federal Medicaid program ($661 million). This is basically health insurance for people who can’t afford it.

There’s another $111 million that goes toward adult public assistance programs and $89 million to pay for child services (like foster care and social workers).

Then there’s $70 million to take care of the elderly, $60 million for mental health programs, and $56 million to help take care of kids in juvenile detention.

Another $60 million pays for various public health programs. The rest of their budget mostly pays for administrative support.

University ($330 million)

The University of Alaska system costs about $900 million per year to operate, but only a little more than a third of that is paid with UGF money. The rest is a combination of federal grants, donations, and tuition.

Of the UGF money, $170 million pays for faculty and staff, and $30 million is spent on making sure they have the tools they need to do their jobs.

Another $90 million is spent on maintaining the campuses. The remainder is a mix of various programs.

Roads, Airports, and Ferries ($180 million)

Most of the Department of Transportation’s budget comes from pots of money that are set aside for specific uses, or from the Federal government through the capital budget. So, the UGF portion of the budget is relatively small compared to the bigger picture.

Of the UGF money, about $86 million goes to support the Marine Highway System. The rest pays for maintenance of the road system and the operation of airports.

Public Safety ($175 million)

The Department of Public Safety has a total budget of $190 million, of which 84% is paid with UGF. The vast majority of these dollars go to pay the salaries of our 626 state troopers. The rest pays for VSPO’s, dispatchers, and other employees, plus the equipment they need to protect the public.

Another $15 million is spent on the Army and Air Guard programs, the Military Youth Academy, and emergency management, all through the Department of Military and Veterans’ Affairs.

Correctional Centers ($280 million)

The State operates 13 major correctional centers across Alaska. The staff to keep those facilities running costs about $190 million.

The other $90 million goes toward supplies, maintenance costs, and other programs.

Resource Management and Protection ($125 million)

The Departments of Fish and Game, Natural Resources, and Environmental Conservation are in charge of managing the State’s resources.

This includes placing restrictions on uses. And balancing competing interests impacting the State’s land, air, water, timber, minerals, and wildlife – through permitting.

It also includes protecting those resources, such as wildfire suppression and oil spill response. As well as selling those resources through things like oil leases and timber sales.

About $60 million of this money goes to DNR, $50 million to DF&G, and the rest to DEC.

Economic and Workforce Development ($30 million)

The Departments of Labor and Commerce are responsible for various functions, including economic and workforce development.

These two agencies (fully named the Department of Commerce, Community and Economic Development and the Department of Labor and Workforce Development) have a combined total budget of over $330 million. However, only 10% of that money comes from the UGF.

That’s because a large portion of the DOLWD budget comes from federally funded programs. And since DCCED is the agency that houses public corporations including AIDEA, AEA, and AGDC, its full budget reflects those corporations’ costs as “other” expenses.

Courts, Law, Legislature, and Governor’s Office ($240 million)

Unlike the departments that implement and enforce the laws of the State, these agencies are the ones that write and interpret them.

The court system accounts for $100 million of this money. The State’s legal team costs another $50 million.

The legislature and it’s staff costs about $65 million and the Governor’s office has its own budget of $25 million.

Administration and Management ($90 million)

The Department of Administration is in charge of all the human resource, budgeting, technology, and general management responsibilities of the State. This includes all the things that are typical of any organization with more than 20,000 employees.

They also manage the State’s buildings, secure office space, and run the retirement and benefit programs for state employees. The total UGF cost of these activities is $70 million.

The Department of Revenue is responsible for administering the State’s tax laws, managing the State’s financial assets, running the PFD program, and enforcing child support orders.

The management of financial assets is paid out of the managed accounts, and the PFD program is paid with money from the Permanent Fund. So it is mostly just the administration of taxes that come from UGF money ($13 million). Another $8 million goes to help single parents collect child support.

State Obligations ($615 million)

A big chunk of the UGF budget goes toward paying off things the State owes. It can be broken down into roughly equal parts for debt service, fund capitalization, and retirement contributions.

Debt Service

The FY19 budget includes about $275 million of payments on bonds. Some of these bonds were issued to construct schools, airports, jails, and other State facilities. But most of these bonds were issued to assist municipalities through the “Alaska Bond Bank Authority.”

Basically that just means that the State goes out and issues bonds to investors, then it turns around and lends that money to municipal governments for their infrastructure projects. Later, the State receives payments from the municipalities to pay off their loan, and the State turns around and uses that money to pay off the bonds.

Fund Capitalizations

There are currently 4 funds to which the legislature appropriates an appreciable amount of money that can be spent without further appropriation. Here they are:

Oil and Gas Tax Credit Fund

This fund is a byproduct of the ACES era credit program, which has since been repealed. The fund was established to help companies that did not have a production tax liability to utilize their tax credits.

There are no credits being earned anymore, but there are still some leftover credits that have not been used. The legislature tried to clear these credits in FY19 via HB331. However, the proposed use of bonding to do so ended up getting challenged in court.

A provision in HB331 said that if the program was challenged, an appropriation of $127 million would be made to the fund so that we didn’t have a gap in payments. So, here we are.

Regional Education Attendance Area (REAA) School Fund

This fund was created in 2010 and updated in 2013. It’s basically a place to store money for the Department of Education to use on school construction and major maintenance, based on their own prioritization of applications.

Community Assistance Fund

This is the new name for the Community Revenue Sharing program. The legislature made some changes to the program in 2016, including the new name.

Basically, this fund holds money for the Department of Commerce, Community, and Economic Development to provide to municipalities. They can use this money for projects that provide essential public services.

Disaster Relief Fund

Money set aside in the event of a disaster.

Retirement System Contributions ($271 million)

The legislature transferred $271 million to the retirement funds this year. This money helps reduce the unfunded portion of the PERS/TRS liability.

This liability is the money needed to pay people who earned pensions from the State before it moved to a 401k type retirement plan back in 2005.

As of right now, the Teachers Retirement System account is about $2 billion short of being fully funded. The Public Employees Retirement System account is closer to $6 billion short. And if investment returns come in low, or retirees live longer than anticipated, the gap may be even larger.

The current plan is to put a few hundred million into these accounts each year for the next 20 years.

Other State Funded Expenditures

The numbers above were just the expenses paid from the unrestricted portion of General Fund revenues. But, we shouldn’t lose sight of the designated and “other” revenues.

I wanted to stick with the UGF conversation first, because that’s what everyone else is talking about. Conversations aren’t productive when we talk about different things.

But I want to at least give you an idea of where the rest of the State funds are flowing. So here’s a graph.

Remember, some of these expenses are duplicated expenditures. So we can’t just lump these values on top of the UGF ones. And pretty much all of these costs are associated with a statutory provision. So we can’t simply stop funding them (at least in theory).

Highlights

But, each of these expenses are worth tracking and understanding. Here are the top 10 non-UGF expenses and funding mechanism:

  1. University ($430 million) – General operations paid from tuition receipts.
  2. Transportation ($410 million) – Equipment fleet paid with interagency receipts, airport maintenance paid from the airport fund, ferry operations paid with marine highway ticket sales, and highway maintenance paid with motor fuels taxes.
  3. HSS ($330 million) – A variety of programs paid with program and interagency receipts.
  4. Revenue ($280 million) – Management fees for investment accounts paid out of the earnings they generate.
  5. Administration ($270 million) – Lease payments and facility management contracts paid with interagency receipts.
  6. Commerce, Community, and Economic Development ($160 million) – Largely public corporation operations paid with program receipts.
  7. Debt Service ($140 million) – Paying off projects out of specified funds (i.e. airport fund, school fund, etc.)
  8. Fish and Game ($80 million) – Sport fisheries and wildlife conservation programs paid from the Fish and Game Fund.
  9. Natural Resources ($70 million) – Trust Land Office expenses paid from the Mental Health Trust.
  10. Education ($50 million) – Mostly performance scholarship program paid out of the higher education fund.

Wrap-Up

The budget is a gigantic beast that is hard to tame. But understanding where our money is going is a good place to get a foothold. And having a firm grasp on both sides of the ledger is also critical.

In this article, I was simply trying to give a high level understanding of where the money is going. I’ve also said nothing about whether the money we are spending is the correct amount. I’m also not suggesting we shouldn’t worry too much about spending since the “fiscal crisis” is really more of an accounting dilemma.

In reality, we shouldn’t be rounding off millions of dollars and lumping discretionary items in with critical ones. We need to take a microscope to every dollar that the State is spending and ensure it is something we are willing to pay for. That’s hard to do.

It’s even harder when the public doesn’t think they are paying for these services. But just remember that every dollar we don’t spend, would be paid in dividends (either now or in the future). And every dollar that is added to the budget gets us one dollar closer to needing a more traditional tax.

Be forewarned, there is no shortage of good ways to spend other people’s money. And every single one of those ideas would be beneficial to some or all Alaskans. The legislature’s job is to determine if those benefits are worth their cost, and our job is to make sure they are doing their job well.

That analysis requires good decision makers with strong leadership skills. I recommend you investigate the people you are hiring to make these tough decisions for you before the election next month.

I hope this article sheds a little light on where the money is going. And I hope you dig deeper into this complicated subject on your own. I know I will.

Next week I’ll try to pinpoint where the budget growth came from when oil prices peaked. See you then.

 

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